Paragon March 2009 Newsletter – Extended Version

Paragon March 2009 Newsletter – Extended Version

In this edition:

Foreclosure Sales in San Francisco

Upper-End Home Market Wilts

New Condo Developments Reduce Prices

Regarding Statistics

Average Dollar per Square Foot in Selected Bay Area Zip Codes

Sales Price to List Price

Financing Conditions & Tax Credits

Foreclosure Sales in San Francisco

San Francisco has the lowest foreclosure rate of any county in the Bay Area, but that rate is accelerating. Of the 4600+ SF home sales reported in MLS in the last 12 months, sales of REO (bank-owned) properties equaled only 3%, but by last November that had increased to 10%, and as of 2/17/09, they constituted over 15% of all houses and condos currently pending sale. 69% of city REO activity is in houses; 22% in condos; 8% in 2-4 unit buildings; and 1% in TICs. Median sales prices for REO homes—at $450k to $500k—are about 60% of the median sales price for the entire city, and though scattered throughout SF, REOs are predominately found in the South/SE neighborhoods stretching from Oceanview to Bayview, and to a lesser degree in SOMA and Bernal Heights.

So far, there has been very little REO activity in areas such as St. Francis Wood, Noe Valley, the Richmond, Pacific Heights and Russian/Nob Hills—though one REO condo sold for over $2m in the Marina, and an REO house is now listed for over $13m in Pacific Heights.

Over 50% of REO listings accept offers within 21 days of going on market, and those sell, on average, at 4% to 5% over list price—buyers snapping up perceived bargains.

These foreclosure stats do not include homes sold at auction.

Upper-End Home Market Wilts

Sales of San Francisco homes under $1,000,000 continue at similar rates as last year, however home sales between $1m and $2m have fallen by over 50% and in the ultra high-end over $2m, sales have declined by almost 70%. Thus days-on-market (the time it takes for the average listing to sell) and months-supply-of-inventory (the time it would take for all existing listings to sell at current rates of activity) for the more expensive homes have soared as well. This huge change in buying trends in San Francisco—a complete flip from a year earlier—began in mid-September with the global market meltdown and all it entailed—including a significant deterioration in high-end home financing conditions. Buyers who can pay all or mostly cash are now kings.

New Condo Developments Reduce Prices

Many of the larger new condo developments in the city—generally located in South Beach, SOMA & Mission Bay—have recently announced across-the-board price reductions of 15% to 25%. This is a classic example of supply and demand dynamics—inventory increasing as demand declines—exacerbated by the increased difficulty buyers are facing in securing financing. Some of these new projects are facing deadlines with their lenders pertaining to achievement of a contractually specified minimum percentage of total units sold by a certain date—providing significant motivation to offer aggressive pricing and terms.

Regarding Statistics

“There are three kinds of lies: lies, damned lies and statistics”
Attributed to Mark Twain

One hears California home prices have dropped 40% or reads SF Metro Area prices have declined 30%. One recent article insisted some SF districts had experienced double-digit appreciation in 2008. (Sorry, no.) And so on. The media loves dramatic—i.e. usually bad—news; some agents deliver only the rosiest view. These analyses might quote median prices, average prices, dollar per square foot, or values based upon secret algorithms—each of which may generate different conclusions. They can encompass sales of houses, condos, TICs, multi-unit buildings, resale homes, new construction, or any mixture thereof—which can be dissimilar markets. If the calculation is based on too short a time period, the number of sales is too small to be statistically reliable; if the period is too long, it may mix data from both before and after major market shifts, muddying the current reality.

With statistics, the devil’s always in the details.

Averages are easily skewed by one or two sales higher or lower than usual. The median price, most often quoted, is that price at which half the homes sell for more and half sell for less, and can be dramatically affected by changes in buying trends as well as changes in values. If the market makes a shift to lower-end homes, such as has happened recently because of financing difficulties for more expensive homes and increasing foreclosure sales in less affluent areas, the drop in median price is larger than the decline in values. The median sales price for houses in SF has been hammered by the numerous foreclosure sales in Bayview-Excelsior—that doesn’t mean that Noe Valley or Presidio Heights values have fallen 30% to 40% in the past year.

Location, location: the Bay Area is full of financial microclimates—for example, depending on location, foreclosure sales range from less than 1% to more than 60% of total sales. The statistics for California don’t apply to the Bay Area; Bay Area stats don’t apply to SF; city stats don’t apply to specific SF neighborhoods. There are city neighborhoods—generally in the SE quadrant—where values have dropped 20% to 30% from their peak. Most have probably seen declines in the 10% to 15% range. In some neighborhoods, there have been too few sales since September 15th to make a meaningful calculation.

Statistics are generalities and the market is changing rapidly. Of course, ultimately, market value is defined as that price a qualified buyer is willing to pay when the property has been well exposed. Our goal at Paragon is to provide the most straightforward, reliable and meaningful statistics available. Here are our latest analyses of the SF real estate market:

All information from sources deemed reliable but subject to error, omission or revision, and not warranted.

Average Dollar per Square Foot in Selected Bay Area Zip Codes

Antioc- – $127

Vallejo – $144

Hayward – $253

Santa Rosa $268

Napa $301

Sonoma – $328

SF Bayview $342

Novato $348

Danville $375

Pleasanton – $386

Daly City $397

San Rafael – $502

Berkeley $510

The Sunset $564

Potrero Hill $658

Saratoga – $672

Mill Valley – $678

Sausalito – $743

Los Altos – $779

Ross – $868

Haight Area – $874

Noe Valley $922

SF Marina – $1127

Atherton $1179

Per DataQuick for 2008 home sales: approximations for the purposes of comparison only. Cities may have multiple zip codes with differing values and zip codes may overlap dissimilar neighborhoods. Values have generally declined since 9/15/08.

Sales Price to List Price

In a seller’s market, the percentage of Sales Price to original List Price (SP/LP) is typically and unsurprisingly high. In a buyer’s market it naturally declines. Thus, in May 2007, probably the peak of the market in SF, the average SP/LP for SF houses was an incredible 104%—4% over asking price (think multiple offers)—but by early 2009, the average SP/LP had fallen to 93% (7% below asking). The parameters of negotiation have changed.

According to Broker Metrics, for YTD sales of houses and condos, Paragon is now the #1 SF brokerage for negotiating their buyers the largest discount off original list price. YTD 2009, our average Sales Price to original List Price ratio when representing buyers is 6.5% below the average for city brokerages as a whole. We’re 5% below the #2 brokerage. That adds up to a lot of money. Whether representing buyers or sellers, we work aggressively to negotiate the best possible price and terms—because that is one of the most important things our clients pay us to do.

The following is not in the newsletter. It includes much of what Julian has already covered in his recent update emails, plus some information I’ve picked up elsewhere. Use it if you find it useful:

Financing Conditions & Tax Credits

Qualifying for home loans is now more difficult and laborious, lenders can be unreliable, and minimum down-payment amounts of 20% – 25% are required (30% – 35% for homes over $2m). But if you can qualify, current rates—especially for conforming loans—are hitting historic lows. If considering a purchase, invest the time now with a qualified loan agent to understand your options, improve your bargaining position with sellers, and perhaps even improve your credit score to obtain better loan terms.

The conforming loan limit has been raised from $625,500 to $729,750: important in high-cost areas like the Bay Area as conforming loans are easier to get and offer better terms than jumbo loans. There has been significant improvement in jumbo loan rates as well.

A tax credit of up to $8,000 for qualified first-time home buyerspurchasing a principal residence January 1 – December 1, 2009: a tax credit is equivalent to a cash refund, whereas a tax deduction only reduces taxable income. The new credit does not need to be repaid as long as you own, and live in, the home for 3 years. It phases out for incomes over $150k for couples or $75k for singles.

Fannie Mae & Freddie Mac increase loan fees and credit-score and down-payment guidelines made more stringent. Unless reversed by the Obama administration, as of 4/1/09, down-payments of less than 30%, or FICO scores below 740, and buyers of condos (as opposed to houses) or 2-unit bldgs with a tenant occupied unit, will trigger higher fees. However, these fees do not apply to FHA loans.

The tax credit for energy-conserving improvements is now 30% of the cost of the improvements up to a maximum of $1500. Eligible upgrades include energy-efficient doors and windows, insulation, heating systems and water heaters.

A surviving spouse selling a principal residence, occupied 2 of the previous 5 years, within two years of their spouse’s death, can now exclude capital gains of up to $500k (up from $250k).

Information derived from sources deemed reliable but may include mistakes or omissions and should be independently confirmed. Special thanks to Julian Hebron of Residential Pacific Mortgage.